1. TAXATION & FINANCIAL STATEMENTS ADVANCED FINANCIAL ACCOUNTING SESSION 7

2. PRETAX FINANCIAL INCOME VS TAXABLE INCOME zPRETAX FINANCIAL INCOME yFINANCIAL ACCOUNTING yINCOME BEFORE INCOME TAXES yINCOME FOR FINANCIAL REPORTING PURPOSES yDEFINED BY GAAP zTAXABLE INCOME yTAX ACCOUNTING yINCOME FOR TAX PURPOSES yTO COMPUTE INCOME TAX PAYABLE yDEFINED BY TAX LAW

3. THEY OFTEN DIFFER: FRENCH CONTEXT zTEMPORARY DIFFERENCE yDEPRECIATION: STRAIGHT LINE VS«DEGRESSIF» yDEFERRED EXPENSES «CHARGES A REPARTIR» (CONCEPTION AND MARKETING EXPENSES) zPERMANENT yNON TAXABLE REVENUES: DIVIDENDS yNON DEDUCTIBLE EXPENSES: TAX ON VEHICLES

4. THEY OFTEN DIFFER: AMERICAN CONTEXT zTEMPORARY DIFFERENCES yDEPRECIATION: STRAIGHT LINE VS MACRS yINCOME MAY BE COMPUTED ON A CASH BASIS FOR TAX PURPOSES yWARRANTY COSTS DEDUCTIBLE WHEN PAID zPERMANENT DIFFERENCES yINTEREST RECEIVED ON STATE & MUNICIPAL BONDS yFINES AND EXPENSES RESULTING FROM A VIOLATION OF LAW yDEDUCTION FOR DIVIDENDS RECEIVED FROM AMERICAN CORPORATIONS

5. EXAMPLE zC. INC. IN 20X0, ITS FIRST YEAR OF OPERATIONS HAS REVENUES OF 130,000 € FOR BOOK PURPOSES AND 100,000 € FOR TAX PURPOSES. IT HAS ALSO EXPENSES OF 60,000 € FOR BOTH BOOK & TAX PURPOSES. zTHE 30,000 € DIFFERENCE IN REVENUES RESULTS BECAUSE C. RECOGNISES REVENUE ON ACCRUAL BASIS FOR BOOK PURPOSES, BUT REPORTS REVENUES AS CASH IS COLLECTED FOR TAX PURPOSES zCOMPUTE INCOME TAX PAYABLE zCOMPUTE NET INCOME

6. FUTURE TAXABLE AMOUNTS & DEFERRED TAXES zSHOULD WE RECOGNIZE ANY OTHER INCOME TAXES FOR BOOK PURPOSES? yTHE ANSWER DEPENDS ON THE EXISTENCE OF TEMPORARY DIFFERENCES yDIFFERENCE BETWEEN THE TAX BASIS OF AN ASSET OR LIABILITY ANS ITS BOOK AMOUNT: RESULTING IN TAXABLE OR DEDUCTIBLE AMOUNTS IN FUTURE YEARS yTAXABLE AMOUNTS INCREASE TAXABLE INCOME yDEDUCTIBLE AMOUNTS DECREASE TAXABLE INCOME ySEE C. INC. EXAMPLE

7. ASSUMPTION zWE ASSUME THAT ASSETS & LIABILITIES WILL BE RECOVERED AND SETTLED AT THEIR REPORTED AMOUNTS yTHIS ASSUMPTION CREATES A REQUIREMENT UNDER ACCRUAL ACCOUNTING TO RECOGNIZE CURRENTLY DEFERRED TAX CONSEQUENCES OF TEMPORARY DIFFERENCES yTHAT IS THE AMOUNT OF INCOME TAXES THAT WOULD BE PAYABLE OR REFUNDABLE WHEN THE REPORTED AMOUNTS OF ASSETS ARE RECOVERED AND THE LIABILITIES ARE SETTLED

8. DEFERRED TAX LIABILITY zA DEFERRED TAX LIABILITY yIS THE DEFERRED TAX CONSEQUENCES ATTIBUTABLE TO TAXABLE TEMPORARY DIFFERENCES yIT REPRESENTS THE INCREASE IN TAXES PAYABLE IN FUTURE YEARS AS A RESULT OF TAXABLE TEMPORARY DIFFERENCES EXISTING AT THE END OF THE CURRENT YEAR

9. IT IS A LIABILITY ! zIT RESULTS FROM A PAST TRANSACTION zIT IS A PRESENT OBLIGATION zIT REPRESENTS A FUTURE SACRIFICE

10. INCOME TAX OBJECTIVES zTO RECOGNIZE THE AMOUNT OF TAXES PAYABLE OR REFUNDABLE FOR THE CURRENT YEAR zTO RECOGNIZE DEFERRED TAX LIABILITIES AND ASSETS FOR THE FUTURE TAX CONSEQUENCES OF EVENTS THAT HAVE ALREADY BEEN RECOGNIZED IN THE FINANCIAL STATEMENTS OR TAX RETURNS

11. FUTURE DEDUCTIBLE AMOUNTS & DEFERRED TAXES zEXAMPLE yDURING 20X1 C. INC. ESTIMATED ITS WARRANTY COSTS RELATED TO THE SALE OF ITS PRODUCTS TO BE 500,000 EUROS PAID EVENLY OVER THE NEXT 2 YEARS yFOR BOOK PURPOSES, IT REPORTED WARRANTY EXPENSE & A RELATED LIABILITY FOR WARRANTIES OF 500,000 yFOR TAX PURPOSES, THE WARRANTY TAX DEDUCTION IS NOT ALLOWED UNTIL PAID (NO WARRANTY LIABILITY IS RECOGNIZED ON A TAX BASIS BALANCE SHEET)

12. DEFERRED TAX ASSET zA DEFERRED TAX ASSET: yIS THE DEFERRED TAX CONSEQUENCE ATTRIBUTABLE TO DEDUCTIBLE TEMPORARY DIFFERENCES yREPRESENTS THE INCREASE IN TAXES REFUNDABLE (OR SAVED) IN FUTURE YEARS AS A RESULT OF DEDUCTIBLE TEMPORARY DIFFERENCES EXISTING AT THE END OF THE CURRENT YEAR

13. IT IS AN ASSET ! zIT RESULTS FROM A PAST TRANSACTION zIT GIVES RISE TO A PROBABLE BENEFIT IN THE FUTURE zIT CONTROLS ACCESS TO THE BENEFITS

14. TAX RATE CONSIDERATIONS zFUTURE TAX RATES yUSE CURRENT TAX RATE yUNLESS NEW RATES ARE ENACTED INTO LAW FOR FUTURE YEARS zREVISION OF TAX RATES yTHE EFFECT OF A CHANGE IN THE TAX RATE IS REPORTED AS AN ADJUSTMENT TO INCOME TAX EXPENSE IN THE PERIOD OF THE CHANGE

15. ACCOUNTING FOR NET OPERATING LOSSES zA NET OPERATING LOSS OCCURS FOR TAX PURPOSES WHEN TAX-DEDUCTIBLE EXPENSES EXCEED TAXABLE REVENUES zGENERALLY GOVERNMENTS PERMIT TAXPAYERS TO USE THE LOSSES OF ONE YEAR TO OFFSET THE PROFITS OF OTHER YEARS zCARRYBACK AND CARRYFORWARD OF NET OPERATING LOSSES

16. LOSS CARRYFORWARD zDEFINITION: OFFSETTING THE LOSS WITH FUTURE TAXABLE INCOME zFrance: IT IS THE NORMAL CHOICE (UNLIMITED) zUSA: IT IS AN OPTION (UP TO 15 YEARS)

17. EXAMPLE zIN 20X0 yLOSS 150,000 yNO INCOME TAX PAYABLE yA DEFERRED TAX ASSET = 150,000*TAX RATE (33.33%) = 50,000. ARE WE SURE TO RECOVER IT? zIN 20X1 yINCOME BEFORE INCOME TAX = 120,000 yOFFSETTING: 120,000 - 150,000 = - 30,000 ; THEN NO INCOME TAX PAYABLE yREDUCTION OF THE DEFERRED TAX ASSET BY 120,000*TAX RATE (33.33%)= 40,000

18. LOSS CARRYBACK zDEFINITON: OFFSETTING THE LOSS WITH PAST PROFITS zFrance: IT IS AN OPTION (3 YEARS BACK) zUSA: IT IS THE NORMAL CHOICE (3 YEARS BACK)

19. EXAMPLE zIN 20X0 yLOSS 150,000 yNO INCOME TAX PAYABLE yAN IMMEDIATE BENEFIT DUE TO LOSS CARRYBACK = 150,000*TAX RATE(33.33%)=50,000 yLIKE A NEGATIVE INCOME TAX yBALANCE SHEET ITEM: INCOME TAX REFUND RECEIVABLE AS A CURRENT ASSET

20. BALANCE SHEET PRESENTATION zASSETS AND LIABILITIES zSHOULD BE CLASSIFIED AS A CURRENT OR NONCURRENT ITEMS zAN INDIVIDUAL DEFERRED TAX LIABILITY OR ASSET IS CLASSIFIED BASED ON THE CLASSIFICATION OF THE RELATED ASSET OR LIABILITY zIF NO RELATION WITH AN ASSET OR A LIABILITY, CLASSIFICATION ACCORDING TO THE EXPECTED REVERSAL DATE OF THE TEMPORARY DIFFERENCE

21. INCOME STATEMENT PRESENTATION zNOTHING COMPULSORY zCOULD BE ALLOCATED TO CONTINUING OPERATIONS, DISCONTINUED OPERATIONS, EXTRAORDINARY ITEMS zSIGNIFICANT COMPONANTS OF INCOME TAX SHOULD BE DISCLOSED yASSESSMENT OF QUALITY OF EARNINGS yBETTER PREDICTIONS OF FUTURE CASH FLOWS